High Court rules on expensive mistake

The High Court has recently handed down a Judgment on a case which may result in a significant cost to HM Treasury to the sum of approximately £258 million.

The case of NRAM PLC v McAdam & Hartley [2014] EWHC 4174 (Comm) sought to determine whether the use of standard loan agreement documentation which referred to agreements being regulated by the Consumer Credit Act 1974 (“The Act”), meant that the loans which were not regulated, (by reason of the loans being over £25,000), still had to comply with the rules and regulations under the Act.

NRAM PLC is the successor company to Northern Rock PLC, previously known as Northern Rock Building Society. Northern Rock Plc was nationalised in February 2008 and is now indirectly owned by HM Treasury.

In the late 1990’s and early 2000’s Northern Rock sold a product called the “Together Mortgage”. This allowed a borrower to borrow up to 95% of the value of their homes on a secured basis. In addition borrowers could also borrow a further fixed sum of up to 30% of the value of their house which was capped at £30,000. This further sum was an unsecured loan but the interest was charged at the same rate as the secured loan.

On 6th April 2008 the law changed which meant that the financial limit, (ie £25000), for regulated credit agreements under the Act was removed. Prior to this a credit agreement was regulated if the amount of credit did not exceed £25,000. From 1st October 2008 there was an additional requirement for all creditors to provide for periodic statements to borrowers of regulated agreements the contents of which were prescribed by Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007. A failure to adhere to these regulations would mean that a borrower would not be liable to pay any interest or default charges during the period of non compliance.

In 2012 NRAM discovered that they had failed to implement the changes made by the 2007 regulations properly. Accordingly, they provided redress to all borrowers who had regulated agreements who received statements which failed to contain the prescribed requirements by providing corrected statements and re-crediting the accounts with wrongly charged interest and default sums during the period of non-compliance.

However, the problem which the Court had to determine in this case was caused as a result of the fact that the loan documentation used between 1999 and 2008 did not differentiate between regulated and unregulated agreements. Loans for more than £25,000 also made reference to the fact they were regulated. NRAM did not provide the same redress for borrowers which fell into this category on the basis that NRAM relied on the fact that the loans exceeded £25,000 and therefore were not regulated. Therefore, they took the view that they did not have to comply with Section 77A of the Act inserted by the 2007 regulations for the loans exceeding £25,000. It appeared that some 41000 customers were affected by this decision many of whom had complained.

The Court was asked to make a declaration on behalf of NRAM that the rights, remedies and protections granted by CCA 1974 did not apply to unregulated agreements.

The Court refused the declaration and decided that as NRAM and its predecessors repeatedly advised the borrowers in this category that the loans were regulated both in the agreements and pre-contract documentation then they would benefit from the rights under the Act. The Court rejected the argument that the loans were unregulated therefore the references to the Act must be disregarded. The Judge decided that both categories of borrowers had to be treated as the same and that there was a breach of the contractual obligations for both. Accordingly, McAdam and Hartley who represented the “unregulated category of borrowers” were entitled to recover the Section 77A repayments.

Unsurprisingly, given the costs implications to HM Treasury, it is understood that NRAM has applied for leave to appeal this decision. Only time will tell whether this decision will be upheld by which time a new government and new HM Treasury may well have to pick up the pieces.